Chapter 9 - Taxation, Investment Wrappers and Trusts

Question 1

What are the main taxes that affect private investors?

Taxation

Answer 1

• Income tax, capital gains tax (CGT)
• Stamp duty
• Inheritance tax (IHT)

Each country has different rules on tax.

Question 2

What are the three types of domiciles?

Taxation

Answer 2

• Domicile of Origin - where the person is born
• Domicile of Choice - Where the reside on a permanent basis
• Domicile of Dependency - where their children, partners, mentally disorders persons depending on them are

Question 3

If a UK resisdent whose permanent home (docile) is abroad or is a non-resident. What tax do they pay in the UK?

Answer 3

Only on income generated in the UK

Question 4

In the UK, how many days do you need to stay to be classed as a resident?

Additional: What are the other factors making you a resident?

Answer 4

183 or more per tax year

Additional: your only home was the UK and you stayed/owned or rented for a minimum of 91 days there and spent 30 days there in the tax year.

Question 5

What automatically makes you a non-resident?

Answer 5

• Spend fewer than 16 days in the UK
• Work aborad full time

or spend fewer than 46 days if you have not been classed as UK resident for
the three previous tax years.

Question 6

What three types of income classes are there?

Answer 6

1. Non-Savings Income (incl. employeement earnings and pension income)
2. Savings Income (incl. bank interest and bonds)
3. Dividend Income

Question 7

Up to what earnings does personal allowance tax apply to?

Answer 7

£100,000

Above that, the remaining is put into bands an taxed at different rates

Question 8

What is the tax free alowance on savings income for the basic rate taxpayer?

known as personal savings allowance

Answer 8

£1000

£500 for higher rate tax payers

Question 9

What is the tax-free dividend allowance for 2023-24 and what basic rate are dividends taxed above that?

Answer 9

£1000 and 8.75%

£1000 and 8.75% for basic rate and 33.75% for higher rate tax payers and 39.35% beyond that

Question 10

Why do we pay National Insurance?

Answer 10

To provide UK social security benefits. including the state pension.

Question 11

Who can claim the UK state benefits?

Answer 11

• The unemployed
• The low income bracket
• The ill, disabled or injured
• Those who have dependants
• Ages over 60
• The pregnant, or those who recently had a baby.

Question 12

What are the UK state benefits?

Answer 12

• Income Support (Universal Credit)
• Job Seeker Allowance (JSA)
• Employment and Support Allowance (ESA)
• Housing Benefit
• Child Tax Credit
• Working Tax Credit

Question 13

When do you pay Capital Gains Tax (CGT)?

Answer 13

When you dispose/sell an asset or receive a capital sum e.g. insurance payout for a damaged asset.

Dispose can mean gift, exchange, transfer.

Question 14

Whats assets are liabile for Capital Gains Tax (CGT)?

Answer 14

• Shares
• Unit trusts
• Certain bonds, and
• Property (except your main home, or principal private residence).

Question 15

What assets are exempt from Capital Gains Tax (CGT)?

Answer 15

• Main Home
• Personal Car and other personal possestions (up to £6000)
• Gilts, Certain Sterling Bonds and Qualifying Corporate Bonds
• Tax exempt accounts e.g. ISA or approved pensions
• Gambling, Lottery or Pool Winnings
• Transfers between spouses.

Question 16

What is the Ineritance Tax (IHT) nil-rate band (NRB) per person?

Answer 16

£325,000

Question 17

After going over the Nil-Rate Band limit (NRB), what rate are you taxed at?

IHT

Answer 17

40%

The nil-rate band limit is £325,000 meaning you pay 0% tax on any less

Additonally if you donate 10% of your wealth on death, the rate will be reduced to 36%

Question 18

What are the major exemptions on IHT?

Inheritance Tax - when do you not pay any IHT

Answer 18

• Assets are left to the deceased person spouse
• Assets are left to registered charities
• Gifts made more thhn 7 years before death
• NIB rate is transferred to partner with the unsued % added onto theirs.

Max NRB per person is £650,000 if there partner is deceased and no money was payed out as IHT when they passed.
Additionally residence nil-rate band (RNRB) can add another £175,000 for the house if eligable.

Question 19

What is Residencial Nil-Band Rate (RNRB)?

Answer 19

An additon to NBR that if eligible can grant an additonal allowance of £175,000 to reduce the IHT on the persons home.

Question 20

What is the Stamp Duty Reserve Tax (SDRT) and its rate in the UK?

Answer 20

0.5%

This when no stock transfer form is used e.g. shares bought on an exchange electornically and procesed through CREST. Rounded to the nearest 1p

Question 21

What is Stamp Duty and its rate?

Not related to SDRT

Answer 21

0.5% if there purchase is more than £1,000

This when a stock transfer form is used for buying shares. This is for when you are transferring shares to someone. Rounded to the nearest £5 for what the amount is based on

Question 22

What investments are exempt from Stamp Duty?

Answer 22

• Most foreign Shares
• OEICS
• Unit Trusts
• ETFs

Question 23

What is Stamp Duty Land Tax (SDLT) and its rate?

Answer 23

3%
(on those buying a second or more property

An additonal 2% (5) for non UK-residents

Question 24

What is the VAT rate?

Answer 24

20%
(applied to taxable goods or services)

Companies,, Broker Commision for execution of stock is all vat-free

Question 25

Who is charged corporation tax (CT)?

Answer 25

Limited Companies, Clubs and Associations on gains. This is charged once a year. The rate is charged on adjusted profit (before dividend pay and tax). ## Footnote Self-Employed are excluded from this and are taxed as earning income rate.

Question 26

Who approves an ISA?

Answer 26

HM Revenue & Customs (HMRC) ## Footnote An ISA has to be approved to offer the tax free account. These are offered by Banks, Building Societies and Fund Companies

Question 27

What are the 6 types of ISA?

Answer 27

1. Cash ISA (Savings Account) 2. Stocks and Shares ISA 3. Innovative Finance ISA (Peer to Peer lending ISA) 4. Lifetime ISA (25% government top up) (£4000 Allowance) 5. Junior ISA (JISA) (Either Cash or Stocks and Shares, Given to Child at 16, Withdrawels start at 18) 6. Help to Buy ISA (Government top up 25%) (£2400 allowance) (No longer available)

Question 28

What is the subscription limit (ISA Allowance) for a Cash/Stocks and Shares ISA

Answer 28

£20,000

Question 29

What is the subscription limit (ISA Allowance) for a Lifetime ISA

Answer 29

£4,000

Question 30

What are the benifits of a pension?

Answer 30

* Tax relief on contributions * No subject to CGT tax * Ability to take the pension from age 55 * Option to take tax-free lump at retiremnet * Includes death benefits

Question 31

What is the current retirement age for state pension?

Answer 31

68 for those born after 1968

Question 32

What are the benefits of an occupational pension scheme? | One provided by your work

Answer 32

Employers must contribute. Reduced cost in contrast to personal schemes The employer has vetted the fund to ensure it is well run.

Question 33

How is an occupational pension scheme structured?

Answer 33

As a trust with the investment portfolio managed by professional asset managers.

Question 34

What is a SIPP?

Answer 34

Self-Invested Personal Pension - A tax free way to invest that you and your employer pay into. Usually occurs if you want to opt out of your workplace pension. ## Footnote Contributions are tax deductable and there is no CGT or income tax

Question 35

# [](http://) In pensions, what are the four investment pathways typically offered?

Answer 35

1. No plan to touch money in 5 years 2. Use money to set up annuity within 5 years 3. Plan to take money out as long-term income within 5 years 4. Plan to take all money out within 5 years.

Question 36

What is a Trust?

Answer 36

A trust is the legal means by which one person gives property to another person to look after on behalf of yet another individual or a set of individuals ## Footnote The creator of the trust is called the settlor (parents) and the person they give it to the trustee (bank). The people who it is inteded for are the benefiaries (children).

Question 37

What are the benifits of creating a trust? | not to be confused with unit trust

Answer 37

1. Provide financial support for children 2. Reduce IHT 3. Seperating out rights to income and capital

Question 38

What are the 3 types of trusts?

Answer 38

1. Bare or Absolute Trusts 2. Interest in Possesion Trust 3. Discretionary Trust ## Footnote 1. In which a trustee holds assets for one or more persons absolutely. 2. In which a beneficiary has a right to the income of the trust during their life and the capital passes to others on their death. These include life interest trusts. 3. In which the trustees have discretion over to whom the capital and income is paid, within certain criteria.

Question 39

What rates of tax will be paid on a dividend by a higher rate taxpayer? | Exam Question

Answer 39

33.75%

Question 40

What assets are liable to capital gains tax (CGT)? | Exam Question

Answer 40

Shares, Unit Trusts, Certain Bonds and Property

Question 41

When does a liability to CGT arise? | Exam Question

Answer 41

Usually anytime an asset is sold that has made a profit

Question 42

How does the eligibility for an individual savings account (ISA) differ between a cash ISA and a stocks and shares ISA? | Exam Question

Answer 42

Cash ISA can be opened by 16 years olds

Question 43

What proportion of the annual ISA allowance can be invested in a cash ISA? | Exam Question

Answer 43

£20,000

Question 44

What happens to a Junior ISA (JISA) when the child turns 18? | Exam Question

Answer 44

It will convert to a Cash ISA or Stocks and Shares ISA where they can have the ability to withdraw.

Question 45

When can a child take over management responsibility for their JISA? | Exam Question

Answer 45

16 | Although they cant buy shares or withdraw until 18

Question 46

What is the key difference between a defined benefit pension scheme and a defined contribution pension scheme? | Exam Question

Answer 46

* Defined Benifit pays out a % of you final salary based on service years as annuity, you cannot take out a lump sum. * Whereas contribution pension is a pot of money you and your employer has put in over the years. You can take this out as a lump sum or have annuity.

Question 47

What is the type of trust in which a trustee holds assets for another person absolutely? | Exam Question

Answer 47

Bare Trust (or Absolute Trust)